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Suppose that a bank has $10 billion of 1-year loan and $15 billion of 5-year loan. These are financed by $15 billion of 1-year deposit
Suppose that a bank has $10 billion of 1-year loan and $15 billion of 5-year loan. These are financed by $15 billion of 1-year deposit and $7 billion of 5-year deposit. The bank has equity totaling $2 billion and its ROE (return on equity) before tax is currently 10%.
- What is the banks asset-liability mismatch?
- What is the profit before tax?
- Let X% be the rise in interest rates next year so that the banks ROE will be reduced to half. What is the value of X?
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